RBA takes aim at interest-only loans

Property | 05 April 2017 | Jack Derwin

Jack Derwin

05 April 2017 — 3:32 am 1 minute read

The Reserve Bank has thrown its support behind the latest measures limiting interest-only loans, with RBA governor Philip Lowe hinting that current tax arrangements may be responsible for Australia’s record household debt level.

Speaking at the Reserve Bank board dinner last night in Melbourne, Mr Lowe said the move by regulatory bodies APRA and ASIC to tighten interest-only lending was supportive of a more sustainable and resilient housing market.

“Like the earlier ‘speed limits’ on investor lending, these new requirements should help the whole system pull back to a more sustainable position,” Mr Lowe said.

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“Hopefully, the changes might encourage a few more people to think about the merit of taking out very large interest-only loans when interest rates are near historical lows.”

APRA said last week that interest-only loans should not exceed 30 per cent of new loans, while institutions have been instructed to limit those with high loan-to-valuation rations (LVRs).

Mr Lowe said the popularity of interest-only loans was fuelled in part by the flexibility of Australian mortgages.

“Many people with interest-only loans make significant payments into offset accounts rather than explicitly paying down principal,” he said.

“This flexibility, which is of value to many people, isn’t available in most countries.”

Mr Lowe also hinted that current tax arrangements may have contributed to Australia’s ongoing household debt issue, which has now risen to 187 per cent of income.

“A second factor is the taxation arrangements that apply to investment in residential property in Australia.”

However, despite the RBA welcoming “these and other prudential measures”, Mr Lowe maintains there are bigger drivers of the housing market.

“The availability of credit is undoubtedly a factor that can amplify demand, but it is not the root cause,” he said.

“It is hard to escape the conclusion that we need to address the supply side if we are to avoid ever-rising housing costs relative to our incomes and to avoid the attendant incentive to borrow that is created by rising housing prices.”